Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 28 MAY 2020

Overall, new coronavirus infections in the U.S. are on the decline as the number of deaths surpassed 100,000. But a small handful of states, mainly clustered in the South, aren’t seeing any improvement. (Axios)

Yes, case are declining…

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…but so is testing!

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New Studies Add to Growing Evidence of Widespread Asymptomatic Covid-19 Infection

Two papers published today add to growing evidence that a significant portion of people infected with the novel coronavirus do not show symptoms, and may silently infect others. (…)

“COVID-19: in the footsteps of Ernest Shackleton” catalogs the plight of 217 passengers and crew on an isolated cruise ship that departed Argentina in mid-March on a quest to retrace the steps of the legendary Irish Antarctic explorer.
None aboard were found to have symptoms at the time of departure, and the first recorded fever among passengers emerged on day eight. Nucleic acid tests (NATs) delivered to the ship revealed that 59% of those on board were positive for SARS-CoV-2, the virus that causes Covid-19, by the 20th day of their journey.

A troubling four-fifths of those showed no symptoms, according to the Australian team behind the paper.

  • Facing its biggest one-day uptick in infections in more than 50 days, South Korean health officials ordered parks, churches, museums and art venues in the Seoul metropolitan area to close through June 14. Students would still be allowed to attend school, though private academies and internet cafes, where young Koreans often gather, were urged to shut down. South Korea, which had relaxed social-distancing measures nationwide in early May, reported 79 new cases Thursday, its biggest daily rise since early April. Many were tied to an outbreak at a distribution center in Bucheon, outside the capital.
  • Australia: Authorities in the country’s two biggest states reported 11 new cases. The head of the country’s central bank said the economy is tracking a little better than the baseline scenario, as the number of new coronavirus cases has been less than expected and restrictions are being lifted earlier than initially thought.
PANDENOMICS
U.S. Businesses See Few Signs of Recovery Through Mid-May Federal Reserve report on business conditions finds evidence of a continued labor-market slide, lower consumer spending

(…) “Although many contacts expressed hope that overall activity would pick up as businesses reopened, the outlook remained highly uncertain and most contacts were pessimistic about the potential pace of recovery,” the central bank said.

The latest edition of the beige book contains information through May 18, some two months after nonessential businesses around the country shut down to help contain the spread of the novel coronavirus. (…)

A beach-area contact in New England reported a “stark increase in inquiries about bankruptcy procedures from small retailers.” The Fed’s contacts in commercial real estate, meanwhile, reported that large numbers of retail tenants had deferred or missed rent payments. (…)

In the New York Fed’s district, (…) while consumer spending continued to decline overall, “there have been scattered reports of a nascent recovery in early May.” (…)

Firms in several parts of the country reported concerns that generous unemployment benefits might make it more difficult to rehire workers. (…) In a survey of firms conducted by the Philadelphia Fed on  impediments to rehiring workers, 33% noted fear of infection, 25% noted lack of childcare, and 29% pointed to the lure of expanded unemployment benefits.

  • An estimated 67% of workers at U.S. technology companies are concerned about losing their jobs to digital capabilities powered by artificial intelligence, machine learning and robotic software, KPMG said in a report Friday. That compares with 44% among workers at companies outside the tech sector. Beyond automation, 70% of tech-sector workers are worried about having their jobs eliminated as a result of the economic fallout from the crisis, compared with 57% of workers employed by companies in other industries. (…) “Workers in the tech industry are closer to the technology and thus have a unique understanding, more so than other industries, of technology and its capabilities,” said Mr. Zanni. (…) (WSJ)
  • American Airlines to Cut 30% of Management and Administrative Staff The reduction amounts to more than 5,000 of American’s roughly 17,000 management and support workers. (…) Airlines agreed to keep their workforces intact through the end of September as a condition for receiving billions of dollars in government aid, with no layoffs, furloughs or reductions in pay rates allowed until then.
  • Amazon to offer permanent roles to 70% of 175,000 new U.S. hires The remaining 50,000 workers it has brought on will stay on seasonal contracts that last up to 11 months, a company spokeswoman said. (…) Amazon said it had 840,400 full and part-time staff at the end of last quarter while it still was in the process of hiring. It has not reported an updated number.
  • Big Bankruptcies Sweep the U.S. in Fastest Pace Since May 2009
  • More than half of small and medium-sized businesses in a recent study by Facebook in collaboration with the World Bank said they will not rehire the same workers they had before the crisis. And about a third of businesses that closed do not expect to reopen. (Axios)
  • This Goldman Sachs chart shows the recovering, but bumpy trajectory for China consumer activity — includes hotels, movie, theater, retail sales, airline seat miles — post pandemic, versus the U.S., where it is obviously deeply depressed. Is China the shape of things to come? (MarketWatch)

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Paul Krugman Is Pretty Upbeat About the Economy In a Q&A, the Nobel-winning economist says the pandemic recovery probably won’t be like the one from the last recession. 

(…) My take is that the Covid slump is more like 1979-82 than 2007-09: it wasn’t caused by imbalances that will take years to correct. So that would suggest fast recovery once the virus is contained. But some big caveats.

One is that we don’t know how long the pandemic will last. Right now, we’re probably opening too soon, which will actually extend the period of economic weakness.

Light bulb Another is that even if we didn’t have big imbalances before, the slump may be creating them now. Think of business closures, which will require time to reverse.

And I also wonder how much long-term change we’ll experience as a result of the virus. If we have a permanent shift to more telecommuting and less in-person retail, then we’ll have to shift workers to new sectors, which will take time. That was an argument lots of people made, wrongly, in 2009, but it could be true now.

All that said, right now I don’t see the case for a multiyear depression. People expecting this slump to look like the last one seem to me to be fighting the last war.

Did you miss The Day After…?

EU Plans $2 Trillion Coronavirus Response Effort The bloc proposed an $824 billion recovery plan and a $1.2 trillion budget over the next seven years, which, if approved, would deepen its economic union in a way that even the eurozone debt crisis failed to achieve.

(…) If backed by all 27 member states, the plan would represent a historic step in knitting together national finances across the bloc. The proposal from the European Commission, the EU’s executive arm, follows a similar Franco-German plan set out last week and would establish significant new transfers of wealth among members, funded by commonly issued debt. (…)

German Finance Minister Olaf Scholz recently compared the proposed assumption of debts across EU borders to Alexander Hamilton’s move in 1790 for the new U.S. government to assume states’ debts from the Revolutionary War. But unlike the U.S. under the Constitution, the EU remains a club of sovereign states, many of which oppose sharing financial burdens. As the crisis fades and political winds shift, even Europe’s more supportive countries could turn against the idea. (…)

The plan’s most controversial element, the EU’s issuance of debt, would be repaid over several decades, starting only in 2028, through a combination of bloc-wide taxes and increased member-state contributions to future multiyear budgets. Some extra money would start flowing this year to stop companies from collapsing and keep public investment flowing. (…)

  • News Corp to Stop Printing 100 Australian Newspapers News Corp said it would stop printing more than 100 Australian newspapers, closing 36 outright and moving the rest solely to the Internet, in its latest response to media shifts accelerated by the coronavirus pandemic.
  • Some 8.4m workers in Thailand “are at risk of termination” because of the impact of Covid-19 on demand for labour, the kingdom’s state planning agency said on Thursday. The number is higher than previous estimates, and reflects growing concerns over the impact of the coronavirus and an ongoing drought on tourism and other industries in south-east Asia’s second-largest economy. (FT)
Left hug Right hug Moscow says Putin and Saudi Arabia’s Mohammed bin Salman agreed to ‘close coordination’ on oil output According to the current deal, the output curbs should be eased starting in July. Various sources have said there are discussions on whether to continue with the current level of production cuts from July onwards.
PANDEMONIUM
The End of Hong Kong’s Special Status Threatens China’s Grand Financial Ambitions Scrapping the privileges the U.S. affords Hong Kong would downgrade the city’s economic role, but a broader basket of financial sanctions could be even more painful for China

The U.S. determination that Hong Kong is no longer autonomous from mainland China has significant implications for the city’s exporters and businesses. But that could pale in comparison to further action by the U.S. to use its dominant position in the global banking system against Beijing.

The most immediate threat is the possible end of the city’s special status as separate from mainland China for import and export purposes under the Hong Kong Policy Act of 1992. Sensitive U.S. technologies could no longer be imported into Hong Kong, and the city’s exports might be hit with the same tariffs levied on Chinese trade.

But the act doesn’t cover the far more extensive role Hong Kong plays as China’s main point of access to global finance. That’s the context in which the Senate’s tentative discussion of penalties against banks that do significant transactions with “persons or entities that materially contribute to the contravention of China’s obligations” should be viewed. (…)

While the U.S. doesn’t directly control Hong Kong’s status as a financial center, Washington has demonstrated its extensive reach over the dollar system, with penalties against Korean, French and Lebanese financiers for dealing with sanctioned parties. The U.S. recently threatened Iraq’s access to the New York Federal Reserve, demonstrating a growing willingness to use financial infrastructure as a tool of foreign policy.

Even though the U.S. can’t legislate Hong Kong’s ability to support Chinese banks out of existence, the role of an international funding hub is greatly reduced if your counterparties are too fearful to do business with you.

Putting the ability of Chinese banks to conduct dollar-denominated activities at risk would be deleterious to China’s ability to operate financially overseas, posing a challenge for the largely dollar-denominated Belt and Road global infrastructure initiative. It would also put the more financially fragile parts of the country, like its debt-laden property developers, under strain. (…)

Any action from the U.S. that strikes a serious blow to Chinese banks is likely to come in piecemeal stages rather than all at once. But the determination that Hong Kong is no longer autonomous could mark the beginning of a squeeze on China’s international financial operations, for which Beijing has no equivalent ability to retaliate.

Huawei’s role in British networks comes under fresh review

The U.K. government is launching a review into Huawei Technologies Co. as officials draw up a plan to reduce the Chinese tech giant’s involvement in new-generation mobile networks over the next three years.

The British government is reevaluating its posture toward Huawei after the Trump administration imposed fresh U.S. curbs this month on China’s largest technology company. The U.K. now needs to assess the potential impact that the fresh U.S. sanctions could have on British networks, officials said. That review will be conducted by the government’s National Cyber Security Centre. Huawei represents a political headache for Prime Minister Boris Johnson. His administration decided in January to give Huawei a limited role in 5G wireless networks and fiber while capping its market share and restricting it from the network core.

  • Iran Warns U.S. on Naval Activity in the Gulf
  • Richard Grenell, the outgoing U.S. ambassador to Germany, issued a warning to his former host country as part of his departing remarks. The United States is preparing new sanctions with bipartisan support to prevent the launch of the Nord Stream 2 natural gas pipeline between Russia and Germany, Grenell said. (Geopolitical Futures)
  • And then there’s the issue of Indian and Chinese troops scuffling at the two countries’ Himalayan border. There have been quite a few skirmishes on the border over the years, but analysts fear this standoff, which relates to disputed territories, could escalate. Thousands of Chinese troops are on what India claims is its soil. The Chinese side says India has been building defense facilities on Chinese land. And each country has a fervently nationalistic government right now. (Fortune)
EARNINGS WATCH

We now have 480 reports in and a blended earnings decline of -12.6%. Trailing EPS are $158.75 and the 12-m forward estimate at $128.63. Interestingly, trailing EPS rose $0.81 since the end of April but forward EPS declined 5.2%.

Q2 estimates: -42.8%, unchanged in the past 10 days. Full year EPS are seen dropping to $125.58, a little lower than the $126.15 of 10 days ago.

83 companies have suspended or canceled their dividends this year, the highest number in a calendar year since 2001. In fact, more companies have cut their dividend —142 of them—in 2020 than in the last 10 years… combined. And it’s only May! (Mauldin)

THE DAILY EDGE: 27 MAY 2020: Rule of 20 Strategy Raises Cash

  • The FT has gathered and analysed data on excess mortality — the numbers of deaths over and above the historical average — across the globe, and has found that death tolls in some countries are more than 50 per cent higher than usual. In many countries, these excess deaths exceed reported numbers of Covid-19 deaths by large margins.
  • Quest Diagnostics Inc. is offering services to large employers geared at getting their employees back to work safely, including testing for the novel coronavirus, analytics to monitor symptoms and hotspots, and services like temperature monitoring, the company announced Wednesday. The Quest program joins similar ones from Laboratory Corp. of America Holdings and health providers like primary-care clinic One Medical, showing how reopening efforts have created a new way for health-care companies to market their services.
Only about half of Americans say they will definitely get vaccinated, poll finds

Only about half of Americans say they definitely would get vaccinated against the novel coronavirus once a vaccine becomes available, according to a poll released Wednesday by the Associated Press-NORC Center for Public Affairs Research.

The poll finds that 49 percent plan to get vaccinated while 31 percent say they are not sure. Twenty percent say they will not get vaccinated.

In the AP-NORC poll, 70 percent of those who do not plan to get vaccinated cite possible side effects among the reasons. Forty-two percent say they fear getting infected with the coronavirus from the vaccine, while 31 percent say they are not concerned about getting seriously ill from the coronavirus.

The Trump administration has pledged to produce a vaccine by the end of the year, a highly ambitious timetable, health experts say.

Only 20 percent of Americans believe that goal will be met, while 61 percent expect a vaccine to become available sometime next year. An additional 17 percent think it will take longer than that. (WaPo)

PANDENOMICS
Reopening of economy stabilizes consumer confidence but concern remains about income

Reopening of economy stabilizes consumer confidence but concern remains about income

Sentiment about job prospects stabilized in May, but a majority of consumers surveyed still expect job prospects to improve. However, a majority of consumers expect their income prospects to decline rather than improve. The last time we saw such pessimism regarding income was during the Great Recession.

In sum, consumer spending is not likely to propel economic recovery in the months ahead.

  • Thumbs down Global GDP Growth Forecasts BofA has revised lower 2020 GDP growth for 28 of 43 countries.

Global GDP Growth Forecasts

  • The rate of U.S. job losses may have slowed in May, according to this chart from the Dallas Federal Reserve:

Salaries Get Chopped for Many Americans Who Manage to Keep Jobs

(…) The hard numbers won’t be in for months, but anecdotal evidence is piling up. On earnings calls, big businesses including The Container Store Group and Lyft have cited what they say are temporary salary reductions. Federal Reserve officials also have found plenty of supporting evidence. (…)

Outside of “high-demand sectors such as grocery stores,” there are signs of “general wage softening and salary cuts” all over the economy, according to a Fed business survey in April. A study by Thomvest Ventures, which looked at 22 public and private technology companies, found that non-executive employees had seen pay reduced by an average of 10% to 15%. (…)

America Inc faces a wave of bankruptcies

(…) In April, Goldman Sachs, another investment bank, predicted that over $550bn of investment-grade bonds will fall to junk status by October (adding roughly 40% by current value to the junk-bond market).

Edward Altman of NYU Stern Business School reckons that about 8% of all firms whose debt is rated speculative grade (about 1,900 in all) will default in the next 12 months. This figure could reach 20% over two years. He expects at least 165 large firms, those with more than $100m in liabilities, to go bankrupt by the end of 2020. (…)

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So the good news is that many squeezed firms staring at bankruptcy might be saved through restructuring. Mr Derrough, a veteran of financial crises, explains that this involves five steps: stopping the bleeding; evaluating the injuries; performing the necessary surgery; rehabilitating the victim; and returning it to health. The bad news is that America Inc is at the start of phase one. As he puts it, “Most of what we are doing is blood transfusions. We haven’t even gotten to stopping the bleeding.” (The Economist)

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As Its Economy Slows, China Embraces a Weaker Currency China set a reference rate for the yuan at its weakest point in 12 years, a signal that Beijing sees the benefits of a weaker currency as it grapples with an economic slowdown and rising tensions with Washington.

(…) Last week Premier Li Keqiang said: “We will keep the renminbi exchange rate generally stable at an adaptive, balanced level.” However, economists and analysts said three consecutive weaker fixings suggested little appetite to defend recent yuan levels, amid growing frictions with the U.S. (…)

The euro-area economy is facing a contraction this year in line with the European Central Bank’s more pessimistic forecasts, according to Christine Lagarde. Output in the region is likely to shrink between 8% to 12%, the ECB president said in an online question-and-answer session targeted at European youth. Estimates for a mild scenario are “out of date.” “We’ll have a better sense in a few days as we publish our numbers in early June, but it’s likely we will be in between the medium and severe scenarios,” she said.

EU Will Propose 750 Billion-Euro Fiscal Stimulus Package

Investment in U.S. Shale Projects to Halve in 2020, IEA Says Energy sector’s transition to renewables is also expected to slow

(…) The Paris-based organization expects global investment in oil and gas to decrease by a third and the financing of all energy projects to decline by 20%. (…) U.S. companies spent on average $35.90 to produce a barrel of oil in 2019, says Rystad Energy AS. WTI hasn’t traded above that figure since early March. (…)

CHANGE IN THE RULE OF 20 STRATEGY

At 3026 on the S&P 500, the Rule of 20 Strategy will raise cash to 30% from 10%. At that level, the Rule of 20 P/E will reach 20.5.

Yesterday, from MarketWatch:

Perhaps what was more interesting was the composition of the rally. Value stocks in particular did well, with the S&P 500 value index (XX:SP500V)  surging 2.5% while the S&P 500 (SPX)  rose 1.2%. The small caps also enjoyed stellar gains, with the Russell 2000 (RUT)  jumping 2.8%.

The S&P 500 is bumping on its 200dma:

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But its equal-weight clone is not quite there yet:

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Lowry’s Research last Friday evening wrote that “Given the less-than-ideal conditions accompanying the recent rally highs, investors are encouraged to buy selectively while awaiting evidence of a likely more sustainable advance. Key to this confirmation would be fresh rally highs in Lowry’s OCO Adv-Dec Line and a new Lowry intermediate trend buy signal.”

These did not seem to happen yesterday even though Lowry’s Buying Power rose to the dominant position:

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Chaikin Analytics’ Dan Russo writes this morning:

As a group, speculators (large and small) remain net short the S&P 500. They were caught massively short at the March 23rd low, but they have not covered. (…) As the index now tests the 40-week moving average (200-day) near 3,013 we have to wonder if a move above that popular measure of long-term trend will induce the a short-covering rally that sends the market to the next stop on the roadmap that we have laid out near 3,110.

Speaking of buying power, Almost Daily Grant’s has this:

Pharmaceutical manufacturer Indivior plc. has enjoyed quite a run this year, with London Stock Exchange listed shares (ticker: INDV) up 58% year-to-date, leaving in the dust the FTSE 100 Index, which is off by 21%.

Yet the enthusiasm of British investors has nothing on that of American ones.  Thanks to a parabolic intraday rally, Indivior’s American Depository Receipts (INVVY on the U.S. pink sheets) traded as high as $40 per share before turning tail, eventually finishing at $11.2, up 17% on the day.  Even with that steep reversal, the ADRs finished the session at a cool 196% premium to the common, after accounting for currency differentials and the five-to-one exchange ratio.

What might be behind that manic price action and still-yawning disparity? Data from RobinTrack.net may provide a clue: According to the website, which tracks individual stock holdings among the millennial-friendly retail trading platform, some 22,600 accounts held shares in INVVR as of mid-afternoon.  Last Monday, when the ADR closed at $2.99, fewer than 1,500 Robinhood users counted themselves as shareholders.

Also, FYI:

Moderna’s top executives sold $29 million in stock after its early vaccine announcement. (LA Times)

PANDEMONIUM

While China has significantly stepped up its purchases of U.S. agriculture products so far this year, including corn, soybeans, wheat and cotton, it is far from the pace necessary to meet targets for purchases overall.

  • Thanks in large part to the pandemic shuttering much of its economy for two months, Chinese purchases of U.S. goods are down 23.5% from 2019’s levels and China was $21.2 billion behind schedule for the first three months of the year, according to an analysis earlier this month from Panjiva, which is part of S&P Global Market Intelligence.
  • The biggest shortfall is in purchases of U.S. energy products, particularly liquefied natural gas, as energy demand has cratered and prices have dropped. (Axios)

Business will be the loser in the US-China fight Both nations are indispensable, so companies face a two-track world

China-US rivalry in ‘high-risk period’, Chinese defence minister says

The strategic confrontation between China and the United States has entered a high-risk period, China’s top defence official said in a rare statement directly naming an adversary.

Speaking during a panel discussion on the sidelines of the National People’s Congress (NPC) on Saturday, Defence Minister Wei Fenghe said that China needed to bolster its fighting spirit, while other military leaders said the country had to catch up with Western nations in its development of core technologies.

“The United States has intensified the suppression and containment of our side since the [coronavirus] outbreak, and the Sino-US strategic confrontation has entered a period of high risk,” Wei, who is also a general in China’s People’s Liberation Army (PLA), said.

“We must strengthen our fighting spirit, be daring to fight and be good at fighting, and use fighting to promote stability.”

Wei’s comments were made available to accredited journalists covering the NPC in Beijing. While it is relatively rare for PLA officers to name specific countries or regions, more have done so this year amid rising tensions between China and the US, and souring ties between Beijing and Taipei. (…)

Li Ka-Shing Hong Kong Group Loses Israel Deal Amid U.S. Push

The Hong Kong conglomerate founded by billionaire Li Ka-shing lost a bid for a major infrastructure project in Israel, weeks after the U.S. asked its Middle Eastern ally to review potential security threats posed by China-based companies.

An affiliate of CK Hutchison Holdings Ltd., the flagship of the tycoon’s sprawling business empire, lost out on the contract to build and operate Israel’s biggest desalination plant to IDE Technologies, a local company, the Israeli government said. In the past, Hutchison Water International Holdings Pte. had operated a desalination plant in the vicinity of the planned facility in partnership with IDE. (…)

Hutchison lost its Israeli bid at a time of rising frictions between the U.S. and Beijing over trade and the deadly coronavirus that originated in China. Israel has found itself caught in this conflict, under pressure from the U.S. to cool its relations with Beijing, rather than expand them as it had hoped. Just two weeks ago, U.S. Secretary of State Mike Pompeo flew to Israel for discussions with Prime Minister Benjamin Netanyahu on issues including China’s role in the Israeli economy. (…)

“We do not want the Chinese Communist Party to have access to Israeli infrastructure, Israeli communication systems, all of the things that put Israeli citizens at risk and in turn put the capacity for America to work alongside Israel on important projects at risk as well,” Pompeo told Israeli media after his meeting with Netanyahu. (…)